On track: ComfortDelGro’s subsidiary clinches Downtown Line contract

DTL Awarded to SBST
The Land Transport Authority (LTA) announced the award of Downtown Line (DTL) to ComfortDelGro’s (CDG) 75% owned subsidiary, SBS Transit (SBST). We see this as a positive development for CDG as it would increase the company’s rail presence in Singapore. However, it is important to note that the licencing framework is substantially different from that of the existing rail networks. The licence tenure had also been reduced to 15yrs from its full completion in 2017, as compared to the existing 30-40yrs.

No requirement to buyback operating assets from LTA
Under the new rail financing framework, LTA would own the operating assets and lease them to SBST for a fee that would be accumulated in a “Railway Sinking Fund” to finance future CAPEX. This removes the requirement for operators to buyback the operating assets at a specified point in time and transfers the CAPEX investment decisions to the authorities. The full licencing framework was not disclosed, except that it would comprise of fixed and variable components and is expected to be c.S$1.6bn over the 19yrs of operations.

3 stages; ridership projections, larger commercial spaces
DTL is scheduled to be opened in 3 stages from 2013 to 2017 and is projected to have daily ridership of >500k upon full completion in 2017. The daily ridership is also expected to increase over time to >700k. The DTL will also have 14,000 sqm of gross commercial space that could significantly improve its ancillary streams of income.

Financial Impact
It is not possible to precisely determine the profitability for the DTL at the moment. However, by assuming a linear build up of ridership growth to 700k daily ridership at the end of the licencing period and a long run annual average fare increase of 1.8%, we estimate total nominal revenue generated over the 19yrs of operations to be approximately S$3.5-4bn. Hence, the disclosed S$1.6bn licence fee would comprise of 40-45% of total fare revenue generated.

While this is significantly higher than the 0.5-1.0% licence fee imposed on the current rail networks, SBST would not need to constantly incur cash outlays for the purchase of new trains and signaling systems. By taking reference to current rental rates, full utilization of the commercial spaces would generate c.S$33mn of annual revenue for the company and is likely to be a significant profit contributor due to its high profit margins.